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MILES O'BRIEN, CNN NEWS ANCHOR: Good morning to you. I'm Miles O'Brien. BRIANNA KIELER, CNN NEWS ANCHOR: And I'm Brianna Kieler taking over for Soledad O'Brien so that she can give her voice a bit of rest.

Now here's a look at the morning headlines. We're following a developing story out India. There have been at least three explosions on commuter trains near financial India's capital of Mumbai. New pictures jus coming in to CNN, so far no details but we are hearing some people have been hurt, possibly killed.

The U.S. is doing more to protect prisoners at Guantanamo Bay in Cuba. Sources tell CNN for the first time all detainees at Guantanamo including al-Qaeda suspects will be granted full protection under the Geneva Convention. That's the international law on holding prisoners of war. The Pentagon will release the new guidelines shortly.

And some bad news for gamblers who deal on the internet, the House is expected to vote today on a bill designed to make it tougher to gamble online. The bill could -- would band using credit cards from online bets.

And some Louisiana officials are slamming a hurricane report. The guidelines were developed by the Army Corps of Engineers. They outline how to protect Louisiana from the most dangerous storms, but state officials including the state senators say the plan is far too short on recommendations.

In Colorado it looked more like late winter than July. Storms brought heavy hail to the southern part of the state on Sunday. But officials say all the wet weather isn't enough to make up for Colorado's lingering drought. Time now for a check on the forecast. Chad Myers is at the CNN Center. What have you got for us, Chad?

(WEATHER REPORT)

O'BRIEN: Thank you very much, Chad. He's on of the few Americans to have been inside North Korea. The Reverend Franklin Graham, son of Billy Graham, traveled there with his Samaritan Purse Relief Ministry. The group plans to go back next month. The Reverend Franklin Graham joining us now from Boone, North Carolina to talk about the situation.

O'BRIEN: First of all, we can't get journalists in there. How do you get in there?

GRAHAM: Miles, my father first went into North Korea back in '92 and met with Kim il-Sung, went back in '94 at the invitation of the North Korea government, he met again with Kim il-Sung and for some reason Kim il-Sung liked my father and as a result of that relationship we have been going back into North Korea every year, multiple times, helping with various projects: Tuberculosis, I've been working in the area with dentistry. And we're going in next month again to take a lot of medical equipment in to the country. But we've been -- we have a close relationship with the North Koreans as it relates to humanitarian work. Now, this is a -- no question a difficult part of the world and as an evangelical, as a Christian we want to try to help the Christians in the country. One of our goals is we want the government of North Korea to know and to understand that as Christians we're not enemy my and that Christians are good citizens. We're commanded by the scriptures to obey those that are in authority over us whoever they may be. We want the North Koreans to know that.

O'BRIEN: I can't imagine there's a very vibrant group of Christians that able to practice their faith inside North Korea. In addition to that, just give us a sense of the kind of conditions you encounter.

GRAHAM: Well, what you've heard from other people, no question, it's a very poor country and you get the further you get away from the capital the worse it is. These people need help. No question. And I don't think sanctions are the way to go, it's not going to affect...

O'BRIEN: Why not?

GRAHAM: Well, it's not going to affect the government. It's -- I mean, there's already sanctions on the country, they have pretty much self-imposed sanctions. These people are suffering and if you put any more pressure on the government it's just going to make the people in the streets, the people out in the country, suffer even more. They need help, Miles. And listen, we need to talk to these people. I disagree with the position of this administration on not talking to them. We have to talk directly to them, regardless...

O'BRIEN: Buy lateral talks? You think you would be bilateral talks, to call on the president to talk directly?

GRAHAM: Well, I think somebody from our administration need to be talking eyeball to eyeball. I go back to China, back in the early '70s when Nixon went into Kissinger to meet with Melzi Tung (ph) and Choinli (ph). These guys were mass murders, but we talked o them. We didn't agree with communism but we still talked them. And we're talking to the communist government today. I think we can absolutely do the same thing in North Korea. And I think it brings the tension down, Miles. We don't want to fight these people, we don't want to go back into another war with these people. We've to find a way to talk to them and find a solution to these problems that has kept us separated all these years.

O'BRIEN: Would you sever in some sort of either official or unofficial role as a negotiator on behalf of the U.S. government?

GRAHAM: Would I be a negotiator I'm not sure the government would want me as a negotiator. There's plenty of people in Washington who are capable of speaking...

O'BRIEN: But you're going there and you can certainly carry messages if you wanted to.

GRAHAM: Well, if we were asked we would certainly do that, Miles. We would want to do anything we can to bring peace and to have a better understanding between the United States and the democratic people of North Korea. We want to do that. And we believe that god would want to us work towards peace. I pray for our president. I pray for the people of North Korea and I hope our work will help us to take the gospel of the lord Jesus Christ to that part of the world.

O'BRIEN: Reverend Franklin Graham thanks for being with us. Good luck in your journey.

GRAHAM: Thank you, sir.

O'BRIEN: Brianna.

KIELER: A big ruling on a simmering controversy on Capitol Hill. In essence, a federal judge ruled members of Congress are not above the law. The judge ruling the FBI did not overstep its bounds when it raided Congressman William Jefferson's Capitol Hill office. "American Morning" Bob Franken is live now from Washington for more.

Good morning, Bob.

BOB FRANKEN, CNN NATIONAL CORRESPONDENT: Good morning, now in effect this is a judge saying, in fact not in effect, but quoting from his ruling had he decided otherwise then congressional offices could become "sanctuaries of crime." He is saying the constitutional separations between Congress, the legislative branch and the executive branch, do not grant absolute protections to members of Congress as we found out on may 20 when the FBI on a Saturday night, Sunday morning overnight raid, raided the office of Congressman William Jefferson who is under for investigation for bribery, and took documents, computer disks, and the like causing an uproar by congressional leaders who said that they were, in fact, protected against that kind of thing. The problem they said is that intimidation by the executive branch would be the result if this was allowed to continue.

So, the case went back to the judge while President Bush who was really getting hammered on this by members of Congress imposes a moratorium. That moratorium was over Sunday and then yesterday the judge ruled that he had been right the first time. These efforts to get evidence could proceed. Meanwhile, the evidence continues to be held. Prosecutors are not allowed to look at it. The lawyers to Congressman Jefferson have gone back to the appeals court and say they want a stay. So, right now it is on hold -- Brianna. KIELER: Bob Franken, live for us from Washington. Thank you.

O'BRIEN: The president, in just a few moments, is going to be releasing a report card and if he's making a big deal about it, we can guess that the government is doing fairly well. The marks might be good. Andy Serwer is here to assess all of that.

And a lot of this has to do with expectations, doesn't it?

ANDY SERWER, CNN FINANCIAL CORRESPONDENT: I think that's right, Miles. The president is going to be highlighting the budget deficit and the fact that it is less than previously projected. Previously over $400 billion this year, now apparently because of higher taxes paid by corporations and wealthy individuals it should be coming in around $300 billion. No doubt the president will be talking about that and perhaps taking some credit because of tax cuts that he put through. Interesting that he will be talking today, just one day after a new treasury secretary has been sworn in, that being Hank Paulson. And I think that this could also perhaps be signaling that the president and the administration might be beginning to talk up the economy as we head to the midterm elections. And the economy is doing rather well. And in fact some critics in his own party say why don't you talk about the economy more?

O'BRIEN: Help us with a little economics 101, Andy, as we wait for the president to speak here. You say that the president will mention tax cuts and say that's helping the deficit. Well, in doing my checkbook that doesn't work that way. We're talking about supply side or trickle down. Why don't you explain what that's all about?

SERWER: Well the way it's supposed to work, and what the president will no doubt be suggesting is by cutting taxes at first you're right, it would suggest the government will be getting less money. But by cutting taxes you would be providing incentives in the economy, giving money back to the people and corporations and in essence so that they could spend more which would create more economic growth which then would produce more revenue for the government. That is the thinking. And obviously that's somewhat controversial. But in fact it's a very difficult to cut taxes and to fight a war on terror at the same time and these are difficult things. That's why we're running a budget deficit and I think even critics of the administration would say it's appropriate to run a deficit when you're fighting a war. That's not an inappropriate cause of -- set of situations right now. So, but if you run through the economy, even given those scenarios, things are actually on pretty good footing right now. If you want to look a little bit at some of the numbers we can look at say the GDP, you can see here that latest numbers shows growing 5.6 percent which is pretty good, that's over the president's term there.

O'BRIEN: Why so good in that third quarter '03-'04 time frame, what happened there?

SERWER: Oh, that was when -- right in the wake of the president's tax cuts, remember the sugar quarter -- the sugar buzz high they called that, and that's sort of off the rail. O'BRIEN: We're still coming down off that.

SERWER: We're still coming off that. That's sort of off the -- and offlander (ph) shot there. Now, if you look at CPI inflation. This is a little bit more of a tricky situation. Still historically low, Federal Reserve of Minneapolis estimating about 3.7 percent, but you can see it ticking up a little bit higher.

O'BRIEN: And there's got to be some inflationary concerns out there right now, given the way this economy is developing. I mean, remember that term we were talking stagflation not too long ago, to bring back an old term from a bygone era.

SERWER: Yeah, that's right. I mean, the real inflationary pressure obviously, guys, is energy prices and that's a real concern and there's different ways of measuring inflation. But if you're out there and you're paying $3 a gallon for gasoline, that's inflation. There's no other way to look at it. I mean, that's a huge expense for most Americans.

KIELER: And isn't this the third year we've seen this where the administration sets up sort of a gloomy prediction and then a few months later we come out with better numbers. I mean, skeptics are jumping all over

SERWER: Well you're right Brianna, and it is the expectation game some are accusing the White House, in other words you've set a really high number that's really scary and the budget deficit's way up there and lo and behold a couple months later, hey things aren't so bad, in other words we are doing a great job. Is the administration actually doing that? Of course they would say no. And you know, these numbers are very, very tricky to forecast. So, hard to say. However some would say that it is a little bit of a coincidence perhaps that this is the third year in a row that things have turned out to be better than anticipated on that front.

O'BRIEN: You know, and this is asking you to jump a little bit more into the political realm. But, do you think economic issues, you know, of course that first Clinton political campaign, "it's the economy, stupid," was at the core of that campaign. Are economic issues, in a time of this global war on terror, the situation in Iraq, apt to propel people to make decisions on votes?

SERWER: Well, I think we're in a really difficult situation right now for the administration because you are really in a situation where the war and the economy are almost on equal stead. And people are concerned about higher gas prices, they're looking and seeing and making sure, you know, what's the job market like out there, how am I doing? But they're also seeing the news, they're also seeing what's going on in Iraq. And you know when the Americans soldiers are getting killed, that is obviously very bad news for the administration. But...

O'BRIEN: We got one minute now, we're told, until the president's going to speak. But I just want you to button this up before we hear from him. He's got a new treasury secretary. Is this treasury secretary going really be having a lot of influence about how the economy is dealt with? Because there -- a lot of critics would have said Mr. Snow was not really driving the bus.

SERWER: Right, well I think that's the hope the president's standpoint that Hank Paulson is going to come in and be a strong force. I think he's really looking to Robert Reuben who was the treasury secretary during the Clinton administration, and coincidentally also from Goldman Sachs as a template, as someone who is...

O'BRIEN: Maybe not coincidentally.

SERWER: Right. Or maybe not a coincidentally -- as someone who can be a strong force and help guide the president and his economic policy and as someone who can really show that the administration has got a grip of the economy and I think that even members of the president's own party would say listen, listen, you've got to talk about the economy. The economy's doing relatively well. It's something you should highlight. It's something that Ronald Reagan was able to use as a political tool and it's something that President Clinton was able to use and so he should, too.

O'BRIEN: And here's the president of the United States. Let's listen as he gives the report card.

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Thank you all. Please be seated. Being thank you all. Please be seated. Thank you. Thanks for coming.

The White House is the people's house and I'm here to talk about the people's money. We're glad you're here. As you know every year my administration produces a budget that lays out our priorities and our goals. And every summer the office of Management and Budget release as report called the Mid Session Review that tells the American people how much progress worry making towards meeting our fiscal goals.

Today OMB director Rob Portman released the latest review. I'm pleased to report it's got some good news for the American taxpayer. This economy is growing, federal taxes are rising, and we're cutting the federal deficit faster than we expected. This good news is no accident, it's the result of the hard work of the American people, and sound policies in Washington, D.C. This morning I'm going to discuss the way forward. I'll explain why our pro-growth policies are vital to our efforts to reduce the federal deficit, what my administration is doing to work with Congress to eliminate wasteful spending, and why we need to confront the unsustainable growth in entitlement spending.

I appreciate our new secretary of the treasury, Hank Paulson, joining us today.

Mr. Secretary you've been on the job one day and got a pretty strong record. I appreciate it.

(APPLAUSE)

I'm proud that Rob Portman's here and he brought his lad with him.

(APPLAUSE)

I thank the senate president pro temp, Senator Ted Stevens for joining us.

Senator, thanks for coming. Thank you for the leadership. I also want to thank David Dreier, Conrad Burns -- Senator Conrad Burns, excuse me. Congressman Joe Knollenberg, Ander Crenshaw, Marilyn Musgrave. Thank you all for coming, Pence is with us. Thanks for coming. I'm proud you're here, Mike. Thank you all for taking time to be here to hear this good news. You're responsible in many ways for creating the conditions for the good news we're about to talk about.

But when I came to Washington taxes were too high, and the economy was headed into a recession. Some said the answers was the centralized power in Washington and let the politicians make the decisions about what to do with the people's money. That was one point of view. We had a different point of view. I believe that the economy prospers when we trust the American people to make their own decisions about how to save, spend and invest. So starting at 2001, my administration worked with the United States Congress and we delivered the largest tax relief since Ronald Reagan was in the White House. We cut rates for everyone who pays income taxes. We reduced the marriage penalty, we doubled the child tax credit and we cut the death tax.

We cut the tax paid by most small businesses because we understand that most new jobs are created by small businesses. And we encouraged economic expansion by cutting taxes on dividends and capital gains. Together these tax cuts left nearly $1.1 trillion in the hands of American workers and families and small business owners. And they used this money to help fuel an economic resurgence that's now in its 18th straight quarter of growth. The tax cuts we passed work.

(APPLAUSE)

Last year our economy grew at 3.5 percent and in the first quarter of this year it grew at an annual rate of 5.6 percent. Over the past three years, our economy has grown by more than $1.3 trillion an amount that is larger than the size of the entire Canadian or South Korean economy. Since August 2003, the U.S. Economy has added more than 5.4 million new jobs. Our unemployment rate is down to 4.6 percent. People are working. Behind these numbers there are American workers who start each day with hope because they have a job to help them build a better life. Behind these numbers there are more families with more money in the bank for college tuition, or a down payment on their homes. Behind these numbers are small business owners who are hiring more workers, expanding their businesses and realizing the great promise of our country.

Our job in Washington is to keep this expansion growing -- going. And to promote pro-growth policies that let Americans keep more of their hard-earned paychecks and aid us in reducing our fiscal deficit. In order to reduce the deficit, you got to set priorities. And working with Congress we've set clear priorities. And the No. 1 priority of this administration and this Congress is to make sure men and women who are defending the security of the United States and helping to spread peace to the spread of liberty get all the help they need from our government. We will always fund the troops in harm's way.

(APPLAUSE)

In an age where terrorists have attacked our country and want to hurt us again, we will do everything in our power to protect the American homeland. Those are the clear priorities of this administration and the clear priorities of the United States Congress. Fighting a war on terror and defending the homeland imposes great costs and those costs have helped create budget deficits. Our responsibility is to win this war on terror and to keep the economy growing. And those are the kind of policies we have in place.

You know, some in Washington say we had to choose between cutting taxes and cutting the deficit. You might remember those debates. You endured that rhetoric. Hour after hour on the floor of the Senate and the House. Today's numbers show that was a false choice. The economic growth fueled by tax relief has helped send our tax revenues soaring. That's what has happening. When the economy grows businesses grow, people earn more money, profits are higher and they pay additional taxes on the new income.

In 2005, tax revenues grew by $274 billion, our 14.5 percent is the largest increase in 24 years.

(APPLAUSE)

Based on tax collections to date the Treasury projects that tax revenues for this year will grow by $246 billion or an 11 percent increase. The increase in tax revenues is much better than we had projected and it's helping us cut the budget deficit.

One of the most important measures of our success in cutting the deficit is the size of the deficit in relation to the size of our economy. Think of it like a mortgage. When you take out a home loan, the most important measure is not how much you borrow it is how much you borrow compared to how much you earn. If your income goes up, your mortgage takes up less of your family's budget. Same is true of our national economy, when the economy expanding our nation's income goes up and the burden of the deficit shrinks. And that's what is happening today. Thanks to economic growth and the rise in tax revenues, this year the deficit will shrink to 2.3 percent of GDP and that's about the same as the average over the past 40 years.

And here's some hard numbers. Our original projection for this year's budget deficit was $423 billion. That was a projection, that's what we thought was going to happen. That's what we sent up to the Congress, here's what we think. Today's report from OMB tells us this year's deficit will actually come in at about $296 billion.

(APPLAUSE) That's what happens when you implement pro-growth economic policies. We face difficult economic times, we cut the taxes on the American people because we strongly believe that the American people should lead us out of recession. Our small businesses flourished, people invested, tax revenue is up and we're way ahead of cutting the federal deficit in half by 2009, as a matter of fact, we're a year ahead of fulfilling a pledge that I told the Congress and the American people.

I said to the American people give this plan a chance to work. We worked with Congress to implement this plan. I said we can cut the federal deficit in half by 2008 or 2009. We're now a full year ahead of schedule. Our policies are working and I thank the members of Congress for standing with us.

See, we cannot depend on just a growing economy, though, to cut the -- keep cutting the deficit. That's just one part of the equation; we also got to cut out wasteful spending. See it's OK to create the revenue growth, that's good. But if we spend all that revenue growth on wasteful programs it's not going to help us meet our objectives. And so the second half of the equation is for this administration to continue working with the Congress to be wise about how we spend the people's money. Every year Congress votes to fund on the day-to-day spending of the federal government, that's called discretionary spending. In other words the Congress decides how much to spend on these types of programs on an annual basis. Every year since I took office we've reduced the growth of discretionary spending. That's not related to the military or homeland security. I told you our priority is military and protecting the homeland. But on other programs we reduced the growth of that discretionary spending.

The last two budgets have actually cut this kind of spending. Philosophy's clear every American family has to set priorities and live within its budget and so does the federal government and I thank the members of Congress for making the tough votes, setting priorities, and doing the hard work on behalf of the taxpayers of this country.

We made good progress with the emergency spending bill that congress approved in June. You might remember the debate leading up to that supplemental bill. And there was a good constructive debate and I weighed in. I said that we, uh, got to make sure that the emergency funding in the bill supported our troops and provided help to citizens that were hit by last year's hurricanes and to prepare for the dangers of an outbreak of pandemic flu. The onset -- I also set limits that I thought were acceptable. In other words, we came up with our view of what would be a rational spending limit for this important piece of legislation. And I made it clear to the Congress they sent me a bill that went over the limit. I would veto it. We got a good relations with Congress. People took that threat seriously, because I meant it. Congress responded by removing nearly $15 billion in spending that had been added to the bill. By meeting the limit I set, Congress ensured funding for vital programs and provided a good example of fiscal discipline.

The next test is whether or not we can get a line-item veto out of the United States senate. Line item veto is an important tool for controlling spending. See, it allow the president to target unnecessary spending that sometimes lawmakers put into large bills. Today when lawmaker, uh, loads up a good bill with wasteful spending I don't have any choices. I either sign the bill with the bad spending or veto the whole bill that's got good spending in it. And I think it'd be wise if seriously about -- seriously concerned about wasteful spending to able the executive branch to interface effectively with the legislative branch to eliminate that kind of wasteful spending. And so we propose a line-item veto at the House of Representatives passed.

Under this proposal the president can approve spending that's necessary, red line spending that's not, and send back the wasteful and unnecessary spending to the Congress for a prompt up or down vote. In other words, it's a collaborative effort between the two branches of government, all aimed at making sure we can earn the trust of the taxpayers. Listen, the line-item veto works, 43 governors of both parties have the authority and they use it effectively to help restrain spending in their state budgets. I've talked to some of these governors, use to be a governor. I know what I'm talking about when it comes to line-item veto being an effective tool.

The line-item veto provides a lot of advantages and one of them is it acts as a deterrent. See, when legislators think they can slip their individual items in the spending bill without notice, they do it. If they think that they're going to try to slip something and it gets noticed, it means they're less likely to try to do so. We want to make sure that the system we have here in Washington is transparent and above board and fair to the people's taxpayer money and one way to do so is to make sure that the president can work with the Congress through the line item veto proposal I submitted. I strongly urge the United States Senate to take this matter up and pass it into law.

We're dealing with the short-term deficit. But there's another challenge that we face. In the long run, the biggest challenge to our nation's economic health is the unsustainable growth in spending for entitlement programs.

Mandatory programs, such as Social Security, Medicare and Medicaid. Millions of our fellow Americans rely on these programs for retirement and healthcare needs. They're important programs. But the spending for these programs is growing faster than inflation, faster than the economy, and faster than our ability to pay for them.

To solve the problem, we need to cut entitlement spending. We need to do something about it is what we need to do. One reason Secretary Paulson agreed to join this administration is because he wants to get something done about these entitlement programs and I want to work with him.

You know it's so much easy just to shove these problems down the road. The easy fix is to say, let somebody else deal with it. Well, this administration is going to continue trying to work with Congress to deal with these issues. That's why I ran for office in the first place, to confront big problems and to solve them. That's why Henry Paulson made the tough decision to leave the comfort of private life to come in and do something good for this country.

And the United States Congress needs to feel that same sense of obligation. The time of playing politics with Social Security and Medicare and Medicaid is over. We need to fix this for younger generations of Americans to come.

I'm optimistic about the future of this country because I'm optimistic about the -- because I understand the nature of the people we got here. I mean we're an entrepreneurial people. We're a hardworking and decent group of citizens. And the role of the government is to foster the entrepreneurial spirit. It's to encourage people. And one way you do that is to keep people's taxes low. Let them keep more of their own money.

We got great faith in the people's ability to spend their money wiser than the federal government can do. And our faith in the people has been proven by the numbers we're talking about today. We say we got an economic issue and we're going to let you have more of your own money to help us recover from recession, the stock market correction and terrorist attacks and war and natural disasters. And the people haven't let us down, have they? This economy is strong.

We also said let's just be patient about solving this federal deficit. We're not going to take money out of your pocket. Let's grow our way out of it. Let's set priorities when it comes to spending and keep the people's taxes low and these revenues will catch up into our Treasury and they have. And we're reducing that federal deficit to the people's hard work and the wise policies in Washington, D.C.

Today's a good day for the American taxpayer. Tax relief is working. The economy is growing. Revenues are up. The deficit is down. And all across this great land, Americans are realizing their dreams and building better futures for their families.

I want to thank you all for supporting our policies. Thank you for giving me a chance to come and visit with you. Remember to thank the members of Congress for doing good work. God bless you all.

DARYN KAGAN, CNN ANCHOR: Been listening in to President Bush at the White House today, touting what the president says are some fine economic impressive numbers. Touting a rise in corporate tax collections. Saying the federal budget deficit will be 300 billion this year which, of course, sounds like a huge number but much less than originally projected, which was 423 billion. A lot of zeros. A lot of numbers. What does it all mean? We're going to break it down with our Andy Serwer in a little bit.

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